Lots of people dream of building their own home or using the vehicle of real estate to replace their current income source. They dream of designing properties to their particular needs and requirements, but then never push go on the project, because they are unsure of how to execute their dreams properly. Everyone has heard numerous stories of builders from hell, and the investment involved in building property is never going to be cheap, so for many people, the risk is just too great.
The good news is that it doesn’t have to be that way, and provided you put in certain safeguards and perform due diligence, there is no reason when you cannot create the perfect property to sell on at a significant profit. And the next piece of good news is that in this article we are going to lay out the blueprint, which when followed correctly will ensure that your dreams can become a reality, and not turn into nightmares.
The number one problem, that many first time entrepreneurs suffer from is a lack of confidence when speaking to builders. The key thing to remember here is that you are in charge, you are the person making the decisions, and you need to be asking probing questions. It might seem a little formal but invite anyone who applies for the contract for a formal interview.
Ask a wide variety of questions including how long they have been in the business, (five years of experience would be my absolute minimum). Ask them to explain a problem they came across in a previous property and how they solved it. This is a great way of differentiating one contractor from another and also enables you to assess how an individual reacts to an unexpected question. Even if you do not necessarily understand their answers, you will be able to see how they talk to you, and whether their explanations are clear, logical and concise.
In the interview ask for a quote for the entire job. This is another excellent test, and an experienced, efficient contractor will have no issues pricing up a job, and in most cases, the prices will be similar. An inexperienced or desperate contractor will often quote a very low price to secure the contract, only for them to then raise the price due to circumstances once the work has started. This is your worst case scenario and one that needs to be avoided at all costs. If the price is too good to be true, it invariably is, you need to avoid this contractor, however tempting it might be.
Ask for three references from the last three jobs they completed. These references should ideally refer to their last three major projects, and be relatively close together. You don’t, for instance, want a reference for work that was completed, two, four and six years ago. This should raise suspicions, as to what happened to all of the work that was done in between. Once you have those references, go the extra mile and follow up with them. Speak to the person who wrote the reference, and confirm that they even exist. Contractors have been known to make references up, in the belief that few people rarely double check. If you find this to be the case, then eliminate that contractor from your deliberations immediately.
Dependent on the state you live in contractors are required to have a license and workmen’s comprehensive insurance. Do not be scared to ask for this, and then take a copy for your own records. Before proceeding any further with negotiations confirm that their license is still valid, that they have not been suspended for any reason, and also check with the Better Business Bureau, to see if there have been any recent complaints lodged against the company.
All of these are important, but the worker’s comp is essential. If the company does not have insurance for their workers, and one of them sustains a significant injury on site, you want to avoid the risk of being held as their employer, as that could and does happen.
Whatever permits that are required from the local building department should always be pulled by the contractor. As the homeowner never get involved in pulling permits, it is not your responsibility and opens up a can of worms that you do not need to be involved with.It is also vital to confirm in writing with the contractor that they are responsible for obtaining a certificate of occupancy when the work is complete and that all necessary inspections are undertaken and passed during the construction process.
This is one of the most frequent areas when investors can make a grave error. First and foremost, they should not be wasting time running around trying to buy materials, but secondly and perhaps more importantly, if the investor buys the materials the IRS could view the homeowner as the employer, and this is not a situation you want to place yourself into.
Another sound test to employ is to ask all the contractors if they are willing and prepared to offer a twelve month written warranty on all parts, labor, workmanship, and materials. If a contractor is not prepared to offer this then in our opinion that is an instant disqualification from the tendering process. After all, if they are not willing to stand behind their work for a period of twelve months, they clearly do not have sufficient faith in the quality of their product.
Whenever you agree to an hourly billing contract, you are giving the contractor license to take as long as they possible can. After all, they are getting paid by the hour, so there is no incentive to complete the job quickly and on time. Never agree to this type of contract, come to an agreement on the overall price, and never pay in advance. The final payment should only be made upon satisfactory completion of the work.
The final check is to ask the contractor where they buy their materials and if the store will confirm that their account has been handled well. The last thing I personally want is to give the contractor money for my building materials, only for that money to be used to pay off his current outstanding bills with his supplier. In the same way as checking out the references, make certain to contact the vendor to confirm the account has been managed well.
Once you have decided to go with a particular contractor, get everything in writing. This needs to be as comprehensive as possible, including the full list of materials, completion dates, confirmed agreement on the work that will be completed, penalty clauses for late completion, confirmation of the responsibility of the contractor to pull the permits, and anything else that you feel is essential to the contract. Then have the contract independently witnessed when both parties sign it. By following these instructions, you will have done everything in your power, to ensure your success.
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